Experts work over retirement system and literacy

Experts work over retirement system and literacy approach

July 8 2009 – A new book on global retirement systems says the defined contribution system that predominates in countries including New Zealand could be improved.

While the authors don’t look at the KiwiSaver scheme, or how the defined contribution (DC) system is utilised in New Zealand, they do take a close look at the United States, Australia and Canada and say the findings there are applicable globally.

In the US, for one, they find the current employee investment education model is fundamentally flawed and in fact ‘downright dangerous’.

“The Retirement Plan Solution: The Reinvention of Defined Contribution” was written by Russell Investment’s Bob Collie, Managing Director Investment Strategy and Consulting and Don Ezra, Co-Chair of Global Consulting, along with Aon Consulting’s Matthew X Smith, senior vice president and the national defined contribution practice leader.

Don Ezra is coming to New Zealand to meet with Russell Investment clients later this year. He and his fellow authors suggest a new approach to financial literacy that challenges the current trend in not only the US, but also New Zealand.

“We believe strongly that it is impossible to make the average plan participant an investment expert,” the authors say. “It is not only futile to attempt to do so, it is counterproductive, and encourages behaviour that results in huge amounts of waste in the system.

“The best solution lies in a change of emphasis away from investment education and towards better default options. This means moving away from an emphasis on choice and education and focusing instead on building prepackaged solutions based on the best practices of institutional investment.”

Much of the book looks at the decumulation phase of retirement – where people have retired and are spending their savings. The book’s savings model shows that, in a sensibly structured lifetime investment program, every dollar drawn down in retirement is composed of roughly 10 cents originally contributed, 30 cents of investment return earned in the accumulation (pre-retirement) phase and 60 cents of investment return earned during the decumulation phase.

“One of the most challenging aspects is how much income can be safely withdrawn in retirement each year,” the authors say. “Too much and you could run out of money. Too little and your lifetime’s efforts and discipline in saving are providing you less than they could.”

The book advocates the benefits of annuities for some parts of the community, noting that social security pensions provide a form of minimum for many retirees and illustrates how the benefits of buying an annuity increase with age. The later you buy an annuity the better.

The authors suggest a new generation of annuity style products will evolve greatly over the coming decade – such as advanced life deferred annuity and products that provide longevity protection, but take more investment risk than traditional annuities,

“There will be choice on a scale that was simply not possible even five years ago,” the authors predict.

Don Ezra says he and his coauthors are really pretty optimistic.

“There are many possible solutions that we outline," said Ezra. "What's more, we give individuals a framework for checking the extent to which they will have enough in retirement for basic expenses, for their desired lifestyle and perhaps also for bequests."

Andrew Doman, President and Chief Executive Officer of Russell Investments, congratulated the authors on their book.

“Russell Investments is steeped in a tradition of thought leadership, innovation and global vision and the approach that this new book takes reflects that heritage well,” Doman says.

“The Retirement Plan Solution” is published by John Wiley and Sons.

Ends

About Russell Investments:

Russell Investments is a global investment management company that believes investors of all sizes can benefit from access to the world's leading money managers. To that end, we research, identify and select best-of-breed investment managers from around the world. We put those managers to work for some of the world's largest investors, financial advisers and individuals saving for retirement.

We provide sophisticated investment solutions including investment and superannuation funds, Pensions, institutional asset management and implementation services, as well as our global equity indexes.

Everything we do is guided by our desire to improve financial security for people. For more information about how we help investors around the world achieve their goals, visit www.russell.co.nz

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